Government asks for feedback on taxing businesses that operate as charities - how much money is out there?

Destiny Church disrupting a pride parade. Photo / Mana News Live video

The Government has got the ball rolling on tweaking tax rules that allow businesses owned by charities a broad exemption from some tax, releasing an IRD consultation document that revealed 11,700 of New Zealand’s 29,000 charities reported business income in 2024.

One of the Government’s proposals would be to tax the top 1300 of them that reported expenses of more than $5 million – 100 charities reported expenses of more than $33m. Estimates have put the potential taxable profit at $2 billion.

The document warned that “[o]nly a portion of these businesses would be carrying on activities unrelated to charitable purposes”, but “the exact number of unrelated businesses will be unknown until the term is formally defined”.

Since 1940, income derived from charity business activities has been tax-exempt, to the extent the charity’s charitable purposes are carried out in New Zealand, the document said. These rules make New Zealand an outlier. According to a 2020 OECD study, most countries have either restricted the commercial activities a charitable entity can engage in, or they tax charity business income if the business income is unrelated to the charity.

On the campaign trail, National became embroiled in questions about taxing charities when speculation emerged it would close the loophole that allowed businesses operating as charities in order to fund their tax plan. That turned out not to be the case, but the party left the door open to looking at the rules at a later date.

The rules have been in the spotlight recently with calls to strip Destiny Church of its charity status. Destiny has said some of its larger trusts operate without being registered with DIA Charities Services, meaning they do not benefit from the exemption.

It has now done so, putting not-for-profit tax reform on the tax work programme. The issue is a complicated one, with the Government keen not to punish charities that are doing good community work, while also closing what many would call an obvious and easily exploitable loophole.

Comments from ministers on Monday evening suggested they were keen to walk this line.

Finance Minister Nicola Willis said, “New Zealand not-for-profits make a significant contribution to the community, and the Government provides tax relief for not-for-profit organisations that meet certain requirements.

“It’s important the public has confidence they are getting value for money from these tax concessions,” she said.

Revenue Minister Simon Watts said the consultation paper canvassed options to “simplify rules, reduce compliance costs and address tax integrity risks”.

“It’s important we make sure the settings are right and fit for purpose.

“No decisions have been made and all feedback will be considered,” he said.

Consultation closes on March 31, meaning the Government will have to move quickly if it wants to get a change into the Budget.

Thomas Coughlan is deputy political editor and covers politics from Parliament. He has worked for the Herald since 2021 and has worked in the press gallery since 2018.